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Treading water

Bank failures squeeze suppliers' credit lines, insurance rates

Diminished demand may prompt seafood suppliers in Asia
    to cut production. - Photo by James Wright
By James Wright
January 01, 2009

The ongoing global economic and financial crises have created the most challenging business climate many seafood companies have ever faced. As the world has confronted unprecedented turmoil, the global seafood industry has not been spared during what is shaping up to be - in the United States, at least - the worst recession in years.

Over the course of 2008, consumers reduced restaurant patronage and spent less on luxury items, which typically encompass many seafood items. Demand is down and overall U.S. seafood consumption could follow; a report by Packaged Facts released last month said per-capita seafood consumption could fall to 15.8 pounds in 2009, down about half a pound from the mark set in 2007.

Also hampering the industry's progress and profits was the collapse of key financial institutions that had traditionally served the biggest seafood suppliers. And as risk increased, the cost of credit insurance soared. While some seafood businesses were forced to alter ownership or operating plans, others shuttered their doors.

Shortly after the subprime mortgage calamity forced U.S. lending firms Fannie Mae and Freddie Mac into federal conservatorship, Iceland placed Glitnir and two other major commercial banks - Kaupthing Bank and Landisbanki Islands - under government control to stave off a wholesale economic meltdown. Glitnir discontinued its international seafood team to focus on its domestic industry and in February will become known as Islandsbanki, its former name. The bank's clientele included large seafood importers and exporters that rely on lines of credit to buy raw materials and to finance their receivables. When the toppling dominoes reached Iceland in October, the splash was heard around the seafood world.

"The financial crisis has a complexity to it that few realize," says Colin MacDonald, CEO of Clearwater Seafoods in Bedford, Nova Scotia. "It has been generated by unmitigated greed and hubris. I am hopeful that the United States will see its way out of the recession sometime in the second half of 2009 followed by the rest of the world in 2010."

While the financial market's downfall may have seemed sudden, economic woes in the United States - and overseas - happened more gradually; the U.S. dollar had been weakening in value for a few years.

But it wasn't until Dec. 1, 2008, that the National Bureau of Economic Research announced that the United States had been in a recession since December 2007 - something most consumers already knew. After looking at real personal income, industrial production and wholesale and retail prices, the NBER concluded that the current economic downturn could be the longest since the Great Depression of the 1930s. It will surely be a fitness test for the seafood industry.

"I believe this is the most challenging financial situation we've seen in my lifetime," says Tim Antilla, VP and senior relationship manager at Wells Fargo in Seattle. "Economically, it remains to be seen [how long it will last]."

A complex situation

The financial market and the economy are separate entities, yet the two are inextricably linked, as both depend on high levels of confidence in their respective marketplaces. Whether on Wall Street or Main Street, lost faith on the part of investors and consumers led to widespread instability and uncertainty.

One of the most closely monitored economic indicators, the Chicago Board Options Exchange volatility index - also known as the VIX or the fear 
index - hit a record high in October. (The index, which translates overall investor sentiment or expected movement in the S&P 500 index for the next 30-day period, was created in 1993, well after the 1929 crash or the 1974 bear market.)

Consequently, banks have reined in their lending activity, says Antilla. Limited lines of credit may slow consolidation within the seafood industry as private equity markets take more caution.

"Deals will continue to get done, but probably not at the same rate as in the past," says Antilla. "The availability of credit has been reduced. It's a function of the de-leveraging going on in the financial industry for more than a year. What credit is available is going to cost more."

At seafood buyers' behest, the entire supply chain is examining ways to trim costs, says John Keane, president of Capitol Risk Concepts, a White Plains, N.Y.-based insurance brokerage firm that specializes in seafood. While Keane hasn't seen "significant manifestations" of the financial collapse in the seafood industry yet, he says some companies fear sales will decrease between 20 and 40 percent in 2009.

"A larger number of buyers are saying, 'You're going to have to find ways to reduce cost without sacrificing quality one iota,'" says Keane. "That means that everyone has to look at their supply and logistics chains, take that dollar apart and put it back together, less expensively. Safety margins, as a result, shrink substantially. The risk of loss increases."

For seafood importers, the risks are already great because they essentially have no control of their goods once they become cargo, Keane adds.

"The complexity of the [seafood] business has grown exponentially in the last five years," says Keane. "It's a tough, tough business." In the end, however, it all comes down to consumer confidence, he adds. "If they don't have the discretionary income, which supports the industry, then that's a problem." SClB Lobsters, anyone?

The industry's poster child for the economic downturn has to be Homarus americanus , the American lobster. Boat prices plummeted in the fall to under $3 a pound, levels unseen in decades. Only 18 months before, when there was a supply shortage and the economy was by all accounts healthier, wholesale prices ballooned to more than $10 a pound.

What plagues lobster is how consumers perceive it: as a luxury item, to be enjoyed only on special occasions. Few opinions were changed even as lobster prices tumbled into hot dog territory.

"Psychologically, when people see their portfolios going down, the last thing they'll do is go out and order lobsters," says Michael Tourkistas, president of East Coast Seafood in Lynn, Mass., which operates lobster holding and processing facilities in New Brunswick, Canada. Before demand plummeted, a 1:1 exchange rate between the U.S. and Canadian dollars had pinched a Canadian lobster industry accustomed to profiting on the exchange rate alone. At press time in mid-December, the Canadian dollar had fallen to the equivalency of 80 cents, a small salve on their wounds.

Clearwater Seafoods canceled its privatization plans in late October due to the downfall of Glitnir, which had committed to financing 10 percent of the deal; a subsequent capital tie-up deal with Japanese conglomerate Maruha Nichiro Holdings was also nixed. Last month, Clearwater earned a seven-month extension from its creditors on nearly $50 million in debt.

"The lending landscape has certainly changed and changed dramatically for the time being," says MacDonald. "The banks seemingly have forgotten that their raison d'etre is to lend funds and instead they have opted for the safe and secure hoarding of funds, the net result of which will be their income streams will dry up.

"In tight times it is natural for consumers and companies to run to security and safety. This is just as true on the supply side of business," adds MacDonald. "This is partly as a result of [buyers] being far less cavalier about their offerings."

In this atmosphere of uncertainty, the role of credit insurance has taken on new importance. The fragmented seafood industry has many players of varying sizes with a set of customers that is equally diverse.

Steve Lapsley, VP and industry manager at Euler Hermes ACI in Owings Mills, Md., says the company had processed 40 percent more applications through October than the previous year at that time. The international firm is regarded as the largest credit insurance agency in the world.

"Demand for our product is way up. People are afraid right now," says Lapsley. "This is an odd time. There have been other recessions, but this one happened so quickly. And it's going to be long and it's going to be deep. The unemployment numbers that came out [in December] - that's 533,000 more people who aren't going to have enough money to buy seafood."

For wholesalers, having uninsured business relationships makes an uneasy situation even more so, says Tourkistas.

"If you don't have coverage, you can't ship to customers feeling secure," he says. "It creates a huge problem and big pressure on risk management.

"Not everyone will fare well [in 2009]," adds Tourkistas, referring to the live lobster industry. "These are extremely trying times. The most important thing is there's no history; this is unprecedented. There's no model that we know of and we've been in business for 30 years."

Traffic halts

With fewer people ordering lobster - or even visiting restaurants, for that matter - the foodservice industry, a major driver for seafood consumption, is hurting. It was only a matter of time before foodservice distributors felt the repercussions.

In November, Poseidon Seafoods of Charlotte, N.C., announced it was going out of business after more than 20 years distributing seafood throughout the Southeast. About 200 jobs were lost; the company blamed the economic downturn. Calls to Poseidon officials shortly after the news broke were not returned.

Gary Karp, executive VP at Technomic, a foodservice consulting firm in Chicago, says the foodservice struggles were bound to impact vendors. What's more, the lending landscape has changed - particularly, asset-based lending is no longer as viable, he says.

"Five to 10 years ago, if you had shrimp in cold storage, that was as good as cash," says Karp, adding that the first six months of 2009 will be "survival of the fittest" for the foodservice industry.

"Now, because the shrimp market has changed quite a bit and has become far more volatile, it's harder to get banks to lend money," adds Karp. "[Companies] are spending less time focused on consolidation and more time focused on survival."

The casual dining sector is particularly vulnerable during a recession, Technomic research shows. While expansion by Portland, Ore.-based McCormick & Schmick's Seafood Restaurants boosted overall revenues, the chain reported during its third-quarter conference call in November that traffic at its 92 restaurants was down by almost 10 percent.

"We believe the current gyrations in the financial markets have put further psycholo-
gical pressure on the consumer," McCormick & Schmick's Chairman Doug Schmick said. "We are clearly not out of the woods just yet and our expectations for [2009] reflect this 

Supply shortage?

Economic struggles are not unique to the United States. Even China's once-booming economy is witnessing decelerated growth. After several years of double-digit gains, its economy is projected to grow by only about 8 percent or less this year.

Struggles are also surfacing throughout Southeast Asia, one of the top seafood-producing regions in the world. Somsak Paneetatyasai, president of the Thai Shrimp Association, hinted in November that Thailand's shrimp production may be cut by 20 percent to match what he expected to be lower demand. Thailand saw its shrimp prices fall by about 15 percent last year.

The United States accounts for more than 50 percent of Thailand's shrimp exports, a total that averaged nearly 400 million pounds from 2005 to 2007.

A similar situation is forming in neighboring Vietnam, a global leader in farmed pangasius and shrimp production. The Vietnam Association of Seafood Exporters and Producers reported in November that many of its member companies would reduce processing capacity by 30 to 50 percent due to reduced orders caused by the global economic crisis.

When supplies tighten, prices typically rise - another turbulent scenario that bodes ill for future seafood consumption.

"There's an old saying, 'The market can stay irrational longer than you can stay solvent.' One can only hope that things will settle down sooner than later," says Antilla of Wells Fargo.

For many seafood companies, the sooner, the better.

Associate Editor James Wright can be e-mailed at jwright@divcom.com

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